Moghalu Warns against Sovereign Debt Crisis

A former Deputy Governor of the Central Bank of Nigeria (CBN), Prof. Kingsley Moghalu, has advised the federal government to be mindful of the implication of several loans the country was seeking.

Moghalu, in a statement yesterday, pointed out that borrowing so much without a real source of revenue to repay would likely result in a sovereign debt crisis.

According to the former presidential candidate, while the popular opinion was that the country’s ratio of debt to GDP was moderate at 21 per cent, “the more relevant ratio is that of revenue to debt servicing which in the region of 60 per cent or more.” This, he said meant that nearly two-thirds of the country’s revenue go to debt servicing, even as he warned that Nigeria was entering, “a dangerously vicious cycle.”

“We need to re-incentivise the economy to be productive. The surest way to do so is wean ourselves of oil dependence through constitutional restructuring that devolves far more powers to regions (not states, many of which are not viable on their own) so they can make use of the economies of scale to create viable regional economies.

“This is why political economy is more important than abstract economics for developing countries,” Moghalu said.

“The federal government borrowing $3.4 billion from the International Monetary Fund and seeking another $3.5 from the World Bank and the African Development Bank without structural economic and constitutional reforms, in an age of declining oil revenues, is to postpone the evil day.

Our country’s moment of reckoning has arrived.

“The fundamental problem is: our extreme reliance on oil for revenues, no fiscal savings, and unwillingness to cut the bloated costs of governance and restructure Nigeria constitutionally to make its economy more productive, cannot be solved by borrowing for balance of payments.

“We need more than $7 billion to solve the balance of payments challenge, but that is not the point,” he said.

According to him, with the anticipated loans, the country’s reserves position may improve temporarily and may see the central bank to continue its intervention in the forex market, which he kicked against.

“In the meantime, if and when the oil price returns to $40 or above the Nigerian government must enter into hedging contracts to protect our oil price at a “floor” price regardless of the fluctuations of the market.

“In a hedging contract we would lose the upside on a price surge but secure a floor of revenue below which we cannot fall. Since it is unlikely that oil will return to the $133 price level that would be required to balance our budget and cure the budget deficit, it doesn’t matter anyway.

“Mexico, which has deployed hedging as a risk management tool to protect its fiscal revenues from oil price fluctuations, has made a $6 billion windfall in the current oil price crash. That’s almost as much as the $7 billion the Nigerian government is borrowing from international financial institutions,” he added.